Costly Cash: In Texas, Towns Try Zoning Out Payday Lenders

Brownsville, Texas, a city in the state's southernmost part, is taking on payday lenders. In December, it placed a six-month moratorium barring these lenders -- which specialize in short-term loans backed by collateral and with interest rates equivalent to 300% to 400% or more annually -- from opening any new "money stores" in town. "Our most vulnerable citizens are easy prey for these legal loan sharks, and we want to protect our citizens by regulating them," says Mayor Pat Ahumada. Located on the Mexican border, Brownsville has a population of 140,0000.

With this measure, Brownsville joined at least six other towns and cities in Texas -- including Irving, Mesquite, Sachse, Richardson, Garland and Little Elm -- that have taken it upon themselves to wage war against money stores. Most of these municipalities have passed zoning laws that prevent payday lenders from expanding into new locations in their city without a special permit.

In town after town, the language used in these resolutions is similar. Brownsville calls its ordinance a fight against lending practices that could be "detrimental to numerous individuals including the elderly, the economically disadvantaged . . . who use these [loans] as a way of overcoming immediate needs for cash."

Mesquite, with a population of 140,000, was one of the first Texas cities that passed such a zoning ordinance, in February 2008. "Any business that depends on people who are desperate and preys on them has no place in my community," says Mesquite Mayor John Monaco.

A Home-State Industry

What's remarkable is that these cities are taking on a powerful industry with deep roots in the state. Texas is actually a sort of Ground Zero for the payday-loan business. Most of the largest operators are headquartered there: First Cash Financial Services (FCFS) and EZ Corp. (EZPW) in Austin, Cash America International (CSH) in Fort Worth, and The Cash Store and Ace Cash Express in Irving. Given these companies' clout, the mayors are expecting them to fight back. But calls and emails to them seeking comment on what their response will be weren't returned.

Interestingly enough, the Texas constitution says annual rates of interest over 10% are usurious. And the Texas Consumer Credit Commissioner sets interest rate limits of around 18%. However, these payday lenders routinely offer payday and car-title loans in the state at annual rates of 500% and above, according to a survey conducted by nonprofit group Texas Appleseed.

"Texas payday loans are among the most expensive in the country," says Ann Baddour, a senior policy analyst at Texas Appleseed, and lead author of a report that was released in April 2009 based on the group's survey of more than 5,000 low- and moderate-income Texans about their need for cash and credit.

A Texas-Size Loophole

So, how do payday lenders operate in Texas when it has a rate cap? Because the lenders have found a loophole by registering in the state as "credit service organizations," thereby evading Texas's limits on interest rates.

"Ironically, a credit services organization under Texas law is an entity that, among other things, improves a consumer's credit history or rating, and provides advice or assistance to a consumer," says Don Baylor, a senior policy analyst at the nonprofit group Center for Public Policy Priorities in Austin. Baylor says payday lenders need to pay only a $100 application fee to register themselves as a credit services organization in Texas.

Because of this loophole, unlike in other states, no regulatory agency in Texas tracks how much fees are charged or how many times these short-term loans are rolled over. After all, it's when the loans extend beyond a month or two, is what could make the high rates of interest unaffordable for many borrowers.

The Texas cities that are passing zoning ordinances are also in a sense taking on the state legislature. That's because several times in recent years, at least 10 bills have been introduced in Texas to curb payday lending, only to go nowhere. "There's no political will in Texas to do anything about it. Bills are buried or delayed to a point where they never get to a vote," says Baddour of Texas Appleseed.
Setting an Example for State Lawmakers

Mayors and city officials feel like they have the pulse of their local citizens and are more aware of the detrimental effects of these high-rate, short-term loans. Brownsville Mayor Ahumada points out that the Texas legislature meets in regular session only once every two years, and he doesn't want his residents to wait so long before bills are considered. "In fact, I want to set the example that the legislature can follow, if need be," Ahumada says.

Other officials are less hopeful of legislative action, which is why they resort to passing zoning laws in their towns. Bill Adams, Mayor Pro Tem of Sachse, a town of 20,000 north of Dallas, says he wrote to several state senators and House representatives asking them to place a cap on how much payday lenders can charge in interest rates. However, he was disheartened.

"One Texas House member even told me that it was never going to happen because the payday lobby was too powerful," says Adams. "That turned my stomach, knowing that decisions are based on special interests rather than on what's best for the people."

So, Adams took up the cause in Sachse. In June 2009, the city passed an ordinance that requires all check-cashing stores and payday and auto-title lenders to apply for a special-use permit before opening any store in the city. The lenders might be able to get through a loophole statewide, but they won't be able to expand in Sachse, he says. Vows Adams: "As long as I'm around, it's unlikely that'll happen."